Overprotection is not the answer

Kevin O’Rourke

Tofu, an important source of protein for many Indonesians, has become very expensive. Controversy reigns about the best way of making sure this staple food is affordable - Alpha (Flickr)

Members of the current generation of Indonesian leaders have vivid memories of catastrophic food crises and widespread malnutrition in the 1960s. Amid persistent poverty and fluctuating global commodity prices, meeting domestic food needs – and thereby averting crises – is a worthy goal. It also responds to the foremost concern of voters, who have consistently cited inflation (especially of food prices) as their number one concern in surveys. President Susilo Bambang Yudhoyono has therefore been placing increasing emphasis on a drive for 'food self-sufficiency'. However, by emphasising protection and intervention, rather than investments and competitiveness, the administration's approach risks achieving precisely the opposite of what it intends.

Restrictive policies

Indonesia is only partway through a fundamental systemic transition. For centuries, political power has derived from patronage, or the mobilisation of economic resources, especially through the generation of abnormal profits, or 'rents', for redistribution as largesse for personal loyalists. Judging both from credible polls as well as the outcomes of multiple elections at the national and regional level over the past 15 years, the vast majority of Indonesians clearly want progress towards the democratic rule of law. However, the deeply entrenched political elite continues to defend patronage-style structures and practices. President Yudhoyono attempted to balance these disparate forces during his first term. But since the 2011 cabinet reshuffle that increased the influence of protectionist policymakers, progress toward reform has stalled. Policymaking has increasingly reflected patronage-style predilections. This has been evident in the mining sector, as well as trade policies and, especially, agriculture.

Article 33 of the Indonesian constitution asserts that the state must ‘control’ the basic needs of the people. This has underpinned long-standing policy efforts to determine outcomes in the agricultural sector. These have often been faulty, costly or counterproductive. For instance, President Suharto made extensive use of the National Logistics Agency (BULOG) to buy and sell at administered prices. In practice, this structure fostered legendary cases of abuse and financial misconduct, while adversely affecting efficiency. In 1999, President Habibie restricted exports of crude palm oil (CPO) in an attempt to flood the domestic cooking oil market and bring down prices; instead, the export restrictions drove up international CPO prices. Domestic prices (of an eminently tradable good) followed this trend – imposing even higher prices on consumers than would have otherwise been the case, while enriching well-connected traders, such as the State Cooperatives Association (KUD) run by officials of Habibie's Golkar Party. In 2003, President Megawati banned imports of rice to protect farmers; but because domestic demand exceeded supply, prices soared, seriously exacerbating poverty.

President Yudhoyono partially relaxed the rice import ban during his first term, but ministers have imposed import restrictions on several other food items during his second term. The agriculture minister imposed a quota system on beef imports, primarily to protect domestic producers and enable them to expand. In fact, as had been the case with rice, import restrictions have driven up domestic beef prices, making an important source of protein less affordable for the poor. Meanwhile, the independent Anti Corruption Commission (KPK) found evidence that the largest recipient of import quotas, PT Indoguna, paid bribes to the agriculture minister's colleagues in the Prosperous Justice Party (PKS): Indoguna obtained lucrative quotas to import competitively priced beef and then re sell it to consumers at inflated domestic prices. KPK investigators conducted surveillance on an aide to the head of PKS and caught him red-handed as he took money from Indoguna executives.

Even after the exposure of this case, ministers continued to advocate for the imposition of import quotas for other food items. The trade minister imposed import restrictions on several dozen types of horticultural products, including fruit and onions. There are further restrictions imposed by the 2010 Horticultural Law, which limits foreign ownership of companies producing horticultural items domestically to 30 per cent. The administration is also reviving and expanding the role of BULOG. Perhaps most notably, in mid 2013 the government imposed a complex quota and permit regime for imports of soybeans (the main ingredient for two staple sources of protein, tofu and tempeh). As had been the case with beef import quotas, the soybean import quotas quickly elevated domestic prices well above international levels. During heightened scrutiny of policymaking amid deterioration in Indonesia’s macro economy, the administration moved in September to dismantle the quota and permit requirements for soybeans.

Untapped potential

President Yudhoyono's pursuit of food self-sufficiency is part of a broad shift away from market-oriented policymaking since the November 2011 cabinet reshuffle. Since then, there have been no initial public offerings (IPOs) of state firms, no significant deregulation measures, and scant progress on crucially important bureaucratic reforms. Instead, policymaking has featured increased roles for state enterprises, regulatory interventions in sectors including mining and retailing, and increased regulatory rigidities in the labor market. Subsidies have remained high. Amid a lack of bureaucratic reform and an unwillingness to challenge vested interests in the Public Works Ministry, land acquisition for infrastructure development has stagnated. In turn, the economy lost competitiveness as exports slowed, while demand for subsidised fuel remained high – producing a worsening current account deficit and a sharp reversal of short term capital flows. The rupiah has therefore lost 20 percent of its value so far this year and growth is decelerating.

The agriculture sector is a major portion of the economy with natural and human endowments that offer enormous potential for growth and prosperity. As a vast tropical nation with volcanic soils and a large literate workforce, Indonesia could be a global leader in the export of myriad high value agricultural products. The prosperity generated by such exports would render imports of lower- value staples, such as rice and soybeans, easily affordable.

A wealth of economic experience worldwide unequivocally shows that increased agricultural production hinges on efficiency and competitiveness. In turn, this requires investment, which is itself contingent on the potential for generating economic returns over the long term. Indonesia's agricultural sector clearly suffers from insufficient investment, due to restrictive regulatory structures, price controls in some areas, and – crucially, especially for small farmers – legal uncertainties about the certification of land ownership. Without clear ownership titles, farmers face a severe disincentive to investing in and upgrading their land – thereby missing opportunities to increase production, boost profits and generate employment. However, rather than reforming the administration of land ownership, boosting infrastructure and encouraging investment, the administration is focusing instead on restricting trade and regulating prices. Risks exist that the bottlenecks and underinvestment that currently depress production will persist, while poor policymaking exacerbates inefficiencies – thereby inadvertently making Indonesia more vulnerable to future food crises.

Kevin O’Rourke (kevin.orourke@reformasi.info) is the author of the book Reformasi (Allen & Unwin, 2002) and the producer of Reformasi Weekly, an analytical report on politics and policymaking in Indonesia.